Once the payment of dividend is permissible on legal and contractual grounds, next step is to ascertain whether the firm has sufficient cash funds to pay cash dividends. It will be possible that the firm’s earnings are substantial, but the firm may be short of funds. situation is common for (a) growing companies; (b) companies which have to retire past loam their maturity year has come; and, (c) companies whose preference shares are to be redeem. Such companies may not like to borrow at exorbitant rates because of the increased financial especially if their existing leverage ratio is already very high. Moreover, lenders may be reluctant money for dividend payments since they produce no tangible or operating benefits the help the firm to repay the loan. Thus, the firm’s ability to pay cash dividends is largely restrict the level of its liquid assets. On the other hand, if excess cash is available, the firm can more liberal dividend policy.